Debunking Five Myths About Managed Accounts

As more employers are adding managed accounts to their retirement plans, there is a growing interest in also using them as a Qualified Default Investment Alternative (QDIA).¹ They offer personalized saving and investment strategies, tailored to each participant’s unique needs and goals. However, several misconceptions remain about managed accounts, often clouding the value they can provide to plans and participants. Let’s take a moment to debunk some of the most common misconceptions we encounter.

Reality: Despite the popular belief that a participant must go into the service’s online user interface and manually input their information for a personalized strategy, managed accounts can receive certain personal data points without this additional effort.

Often, an employer can help provide some data themselves, such as salary info, contribution rates, and account balances, through data integrations with their recordkeeper and managed accounts provider. And, in many cases, recordkeepers also provide eight to 15 data points for each participant. That way, even if a participant never goes into the service, there will be some uniquely personalized factors for the service to consider when creating their strategy.

Reality: While managed accounts may have higher fees than options like target-date funds, they provide personalized retirement strategies that go beyond what a simple fund may offer.

For example, managed accounts can deliver advice tailored to a participant’s goals and financial background: how much to save each paycheck, what age to retire, when to take Social Security withdrawals, how to create a spend-down plan once retired, and so much more. Not to mention, managed accounts provides ongoing management of a participant’s retirement account to help them navigate life changes and market fluctuations.

Even though managed accounts and target-date funds are often compared, especially in pricing, we don’t see them as comparable products. A target-date fund is an investment vehicle while managed accounts is a service that provides a holistic retirement strategy. Given this, we believe managed accounts is more like hiring a financial planner—which can often cost upwards of 100 basis points. So, managed accounts may be more expensive than a target-date fund, but it provides more tailored advice at lower cost than the alternative of meeting with a financial planner.

Reality: It’s true that, in the U.S. at least, the opportunity exists for an employer to be sued over their retirement plan—however, there’s no inherent legal risk that’s unique to managed accounts compared to other options.

When it comes to QDIA specifically, the Pension Protection Act of 2006 explicitly states that managed accounts is an acceptable vehicle for a default option. If due diligence is done well and the managed accounts offering is properly implemented and monitored, the services adhere to fiduciary standards.

Still, we understand there may be difficult to conduct due diligence. That’s why we’ve worked with Groom Law Group to create a checklist for plan sponsors to help make sure they’re evaluating their options carefully and selecting a managed accounts offering that adheres to fiduciary standards. A checklist like this can help provide clear guidance to help make sure you’re doing your due diligence on any product you introduce to your retirement plan.

Reality: Target-date funds may be common, but that doesn’t mean managed accounts are more complicated for plans to implement.

Our Morningstar Retirement team has numerous recordkeeper connections—which means, for our managed accounts service, the hard part of the implementation process has already been done through them. We work closely with the recordkeeper to ensure that the work a plan sponsor must do to implement managed accounts is minimal.

We do recommend that plan sponsors help educate their employees about managed accounts. We have materials to help you with that, such as An Employers’ Guide to Morningstar® Retirement Manager^SM, if you need them.

Reality: Managed accounts’ performance may be harder to assess because of how personalized it is to each participant, but it can still be benchmarked.

Since managed accounts is more of a holistic service, plan sponsors should look at the impact on participants not only from an investment perspective, but also through other lenses. Our research has shown that managed accounts enrollees have higher savings rates and a better wealth outlook at retirement. In fact, after using managed accounts, 72% of off-track participants increased their savings rates. The median deferral rate was found to be a 33% increase from what individuals were saving prior to opting into the service, or about an average of 2% of their salaries. ²

Click here for a link to more information about the Impact of Managed Accounts Study.

Managed accounts is a robust retirement option with a wide range of services and a unique value to participants, so there’s bound to be some confusion around it. Here at Morningstar Retirement, we want to help make retirement a reality by clearing up these common misconceptions. Morningstar Retirement Manager, our managed accounts service, can help make it easier for you to build a customized strategy and put your employees on the path to their unique retirement goals. If you have any other questions, please visit Morningstar Retirement’s website for more information.